Presentation is loading. Please wait.

Presentation is loading. Please wait.

Cost of Establishment August 5, 2008 1. Carlos Carpio, Ag Econ, Clemson Charles Safley, ARE, NCSU Barclay Poling, HS, NCSU 2.

Similar presentations


Presentation on theme: "Cost of Establishment August 5, 2008 1. Carlos Carpio, Ag Econ, Clemson Charles Safley, ARE, NCSU Barclay Poling, HS, NCSU 2."— Presentation transcript:

1 Cost of Establishment August 5,

2 Carlos Carpio, Ag Econ, Clemson Charles Safley, ARE, NCSU Barclay Poling, HS, NCSU 2

3  Estimate the cost of producing & harvesting muscadine grapes (wine grapes)  Enterprise Budget  Evaluate the profitability of establishing a Muscadine grape vineyard  Cash Flow Analysis  Net Present Value  Internal Rate of Return 3

4  Cost estimates were based on a 10 Acre vineyard  Production practices were based on management practices recommended by Extension Specialists and Farmers  Equipment costs were based on 2005 purchase prices  Input prices were collected from farmers and dealers who supply NC grape growers 4

5  Bilateral cordon system  Vertically shoot-positioned canopies  Internal-end-post brace assembly  622 grapevines/acre  Row width 10’  Vines spaced 7’ apart 5

6 QtyCost Materials - Vineyard Posts1,560$7,800 - Brace Posts 6”x6”x8’ 5283,696 - Other materials ,526 Total Materials $22,022 Equipment costs ,400 Labor costs828 hrs5,198 Total$28,620 6

7  Bird netting: $800/acre (3 rd year) 45 hours of labor  Deer Control: None Fence ≥ 7.5 feet  Frost Control: None Wind Machine $28, hours/year 7

8  Full time employees  Wage rate: $8.25/hour  Required expenses: 2.31/hour  Total cost: $10.56/hour  Trellis construction  Part-time labor: $8.25/hour 8

9  Drip Irrigation: $2,274/acre  Machinery & Equipment Costs: Prep Year: $58,585 First Year: $10,572  Harvest in September  Custom harvest rate: $100 per ton  “Base” Price: $1,400 per ton 9

10 YearYield (Tons/A)

11  Most of the machinery and equipment can be used for other farming operations  Equipment cost estimates could reflect only the costs associated with grape production  Based on estimated costs per hour  Exceptions:  Irrigation equipment was used only for grape production 11

12 Purchase Price Cost per hour* Total Cost per hour Tractor, 60 hp $ 25,000 $ 7.81$ Spot sprayer, 26 g Fertilizer spreader Tine chisel plow, 7’ 2, Disk, 9’ 3, Soil auger Post driver 2, Utility trailer 2, * Cost Estimates do not include depreciation

13 Fuel Prices Estimated Cost per Hour FuelLubricantsTotal $ $ $ $ $ $

14 Fuel Prices Estimated Cost per Mile FuelLubricantsTotal $ $ $ $ $ $

15 1 st Year2 nd Year3 rd Year4 th Year Mar Apr May Jun July Aug Sept Total

16 1 st Year2 nd Year3 rd Year4 th Year Mar$ 1,344$ 118$ 340$ 397 Apr May Jun July Aug Sept Total$ 3,274$ 1,789$ 3,039$ 3,230 16

17 Price ($/T) Yields (tons/acre) Break- even yield ,582-1,442-1,302-1,162-1, , , ,0971,3571, ,7001,6571,9772,2972,6172, ,0002,7373,1173,4973,8774,

18  Breakeven Price  Price that covers the estimated total cost  Total cost = Fixed cost + Variable costs  Profit = $0.00  Shutdown Price  Price that covers only variable costs 18

19 Production System YieldNet returns Breakeven price Shutdown price T/acre$/acre $/ton Drip Irrigation 4.00$1,097$ 1,126$

20  Important to see when the dollars come in and the returns available in other enterprises  The sooner a dollar comes in, the sooner it can be used to earn more revenue  For any two enterprises of equal risk, the one yielding the higher rate of return is usually preferable 20

21 YearsDrip Irrigation 0-5, , , ,370 21

22 22 Accumulated Cash Flow YearsDrip Irrigation 0- 5, , , , , , , , , , ,363

23 23 $27,351 Chardonnay Grapes Breakeven Year

24  The year when enough revenue has been generated to cover start-up expenses.  To secure a loan of shorter duration could leave the farming operation insolvent. 24

25  Today’s cash equivalent value of the 20 year vineyard.  Assumes you can invest money at a given interest rate  “Best” interest rate is low risk alternative, e.g. long term certificate of deposit  Essence is the enterprise should be accepted if the NPV > $0 25

26 $8,807/acre  A new 10A Chardonnay Grape vineyard is worth $8,807/acre today  Someone would have to pay you $8,807/acre to bribe you NOT to establish this vineyard 26

27 12.67%  Compared to a Treasury Bond that yields 4.98%:  A Chardonnay Grape vineyard with an IRR of 12.67% looks pretty good!  The closer an IRR is to the Treasury Bond of 4.98% the vineyard is not as attractive when you consider the risk and amount of time associated with grape production 27

28 Price Received Breakeven Year NPVIRR $1,10017-$2,905/A3.30% $1,20013$999/A6.85% $1,30011$4,903/A9.92% $1,4008$8,807/A12.67% $1,5008$12, % 28

29  Assumed Yields:  Year 6: 2 tons/a  Year 10: 2 tons/a  Year 13: 0 tons/a Loss of production was known early enough in the production season, so the grower could adjust her/his costs accordingly Maintenance cost of $250/a  Year 17: 1 ton/a 29

30 Price Received Breakeven Year NPVIRR $1,100n/a-$7,576/A-2.57% $1,20019-$4,223/A1.70% $1,30014-$870/A5.18% $1,4009 & 11$2,482/A8.2% $1,5009$5, % 30

31  Purchase Price: $28,000  Estimated Annual Use: 50 hrs/yr  Estimated Annual Cost:  Equipment Costs: $ 150/A  Labor Costs: $ 158/A  Total Costs: $ 308/A 31

32 Price ($/T) Yields (tons/acre) Break- even yield ,181-2,041-1,901-1,761-1, ,100-1, , , ,7001,0591,3791,6992,0192, ,0002,1392,5192,8993,2793,

33  Total Accumulated Cash Flow  $19,055  NPV  $3,533/A  IRR  8.59% 33

34  A new 10A commercial Chardonnay Grape Vineyard can be a profitable venture under the assumptions in this analysis  Price  Cost  Market  Critical Success Factors: 1. You have a stable market with a reputable winery, marketing association, wholesaler, etc. 2. You can meet the buyer’s requirements. 34

35  70 Wineries in 30 Counties  350 Vineyards 35

36  Implement the Production Plan w/o developing a Marketing Plan and/or a Financial Plan  An unrealistic Financial Plan (e.g. estimated costs are too low while returns are too high, costs are overlooked, etc.).  The Marketing Plan is an afterthought  The Marketing Plan is inadequate &/or lacks key components that could help the business succeed  What happens if the primary market falls apart? 36

37  Budgets are only guides – not substitutes for a grower’s own cost estimates  Yield patterns assumed no adverse weather, production setbacks or marketing difficulties  It was assumed that growers had a market for the grapes  Recommended that each grower estimate their production and harvest costs & conduct a profitability analysis based on their own production techniques and price expectations. 37

38  Charles D. Safley  


Download ppt "Cost of Establishment August 5, 2008 1. Carlos Carpio, Ag Econ, Clemson Charles Safley, ARE, NCSU Barclay Poling, HS, NCSU 2."

Similar presentations


Ads by Google